Goldman Sachs is Probably Not a “Buy”

The Daily Reckoning

Jan. 31, 2012, 5:15 PM

"I don't know much about the stock market," says Matt Taibbi, the witty critic of Goldman Sachs and other financial atrocities, "but when the O'Neills of the world start telling me what a great investment opportunity the American stock market is, I start getting the urge to buy canned food."

The specific O'Neill that Taibbi mocks is Jim O'Neill, head of Goldman's Asset Management department. "It seems," Taibbi observes, "that O'Neill is predicting that the United States stock market may go up '15 to 20 percent [in 2012].'"

On its face, this prediction seems pretty tame…and harmless. But Taibbi — like many other cynical financial market observers — has learned to regard every pronouncement from Goldman Sachs with suspicion. Recent experience has demonstrated that "tame" and "harmless" are attributes that rarely operate within the Goldman Sachs business model. "Conniving" and "conspiratorial" seem much closer to the mark.

According to Goldman's critics, the investment bank's "recommendations" often advance a self-serving agenda. A "strong buy" recommendation from Goldman, for example, could mean the Goldman trading desk already owns the recommended security and is looking to unload its position into a rising market.

Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks…Translation: run from European bank exposure.

Sure enough, Euro bank stocks plummeted a few days after that Zero Hedge post.

As a result of Goldman's alleged — albeit unproven — "pump-and-dump vibe," its recommendations often seem very poorly timed (from the standpoint of its clients), which, of course, would make them very well-timed from the perspective of Goldman's trading desk.

"Goldman is building an impressive résumé of sweepingly bullish predictions that later on, in retrospect, look more like signals to investors that they should have run screaming in the opposite direction," Taibbi remarks. "A good example might be May of 2008, when Goldman boldly predicted that oil would go to $200 a barrel; oil would go on to peak at $147 less than two months later and crash to the floor soon after… Anyway, every time I read one of these rah-rah predictions, I get this feeling that I've seen this movie before."

Concerning Goldman's bullish outlook on US stocks, Taibbi remarks, "O'Neill apparently believes Ben Bernanke and the Federal Reserve will resort to another round of money-printing, and finally green-light the long-awaited 'QE3,' or third round of 'Quantitative Easing.'

"The QE programs," Taibbi continues, "involve the Fed printing hundreds of billions of dollars and pumping them into the marketplace, where they ostensibly stimulate the economy (although recent experience tells us that the money mostly ends up being swallowed by the financial services industry — but that's another subject for another time). Anyway, Bernanke declined to go ahead with a third QE program in late 2011, but O'Neill apparently thinks we'll get it in 2012."

O'Neill is hardly the only Wall Street bigwig to predict rising share prices in 2012. And a 15% to 20% gain for the S&P 500 is hardly an outrageous forecast. So why does Taibbi make a big deal out of it?

Probably because of that old expression, "Fool me once, shame on you. Fool me twice, shame on me." Goldman's high-stakes hijinks are infamous. Remember, this was the firm that continuously packaged and sold mortgage-backed securities (MBS) to its clients, while simultaneously building a meaningful short position in the identical (or very similar) mortgage-backed securities. This practice was perfectly legal, but it was also perfectly scummy.

It was a little like selling tickets for an ocean cruise, then buying a disaster insurance on that particular cruise because you had some knowledge that the ship was barely seaworthy. Hey, you didn't force anyone to buy a ticket for the cruise; you simply designed the cruise, then marketed it and sold tickets.

So if Goldman devoted itself to a series of perfectly legal — but morally bankrupt — business practices during the go-go years of 2005 to 2008, would it not be tempted to do even more of the same during the grim conditions of 2011-12?

Likely…which is just one reason why Goldman Sachs is probably not a "Buy." Tomorrow we'll share one reason why it probably is a "Sell."